It’s the weekend after the general election in 2010. David Cameron has failed to win enough seats to win an overall majority and Gordon Brown is still prime minister. Talks are going on among the Conservatives, Labour and the Liberal Democrats to see who can form a government.
The coalition that saw Cameron become prime minister five days after the election was, Nick Clegg claimed again yesterday, a matter of necessity. Suggesting that the Lib Dems were simply doing their patriotic duty, the deputy prime minister said the government was born in the “midst of an economic firestorm”.
Economic firestorm? In Greece and some of the other countries in the eurozone maybe, but not in the UK. The economy had been through an extremely tough period but by May 2010 was on the mend. Growth had resumed in the autumn of 2009, and in the first two quarters of 2010 the economy expanded by 0.5% and 1% respectively. In those two quarters, there was almost as much growth as in the subsequent two years with George Osborne as chancellor.
Nor were the other traditional warning signs of trouble flashing red. The pound had stayed rock steady throughout the election campaign even though the polls had been clear throughout that there would be no overall victor. Interest rates on government bonds are one of the best guides to whether investors have confidence in a country or not, and are carefully monitored by the Bank of England. Election day was on 6 May in 2010 and here’s what the Bank said in its May 2010 inflation report, its quarterly health check on the economy: “On average, in the 15 working days to 7 May, 10-year gilt yields (the benchmark interest rate for UK government borrowing costs) were at a broadly similar level to the average in the runup to the February report.”
So, no run on the pound. No sign of international investors dumping gilts. The economy is growing. Where’s the firestorm?
The answer is that there was a crisis, but it was going on in Greece, not Britain. Alistair Darling spent his last weekend as chancellor in talks with fellow EU finance ministers that eventually led to the first Greek bailout.
Clegg’s version of the events that led to the coalition suggests that urgent action was needed to prevent Britain going the same way as Greece. This is nonsense. Unlike Greece, Britain was not a member of the euro. Unlike Greece, Britain had control over its own economy, with the Bank free to set official interest rates at whatever level it deemed appropriate for domestic conditions. The pound was free to find its own level. Investors understood all that, which was why in May 2010 the interest rate on 10-year UK government debt was 4%, while in Greece it was 12%.
Over the years, a great myth has been spun about the state of the economy in 2010: the crisis was entirely due to Labour profligacy; Gordon Brown’s profligacy had laid waste to the public finances; the UK was on the brink of bankruptcy making extreme austerity measures inevitable. Clegg’s “economic firestorm” is the latest piece of myth weaving.
The truth is that the coalition inherited an economy that was on the mend, overdosed it with austerity, and put back recovery for two years.
